Companies find themselves faced with a mountain of work with the new sustainability reporting requirements. However, those that integrate sustainability into their strategies can benefit, says Professor Xavier Baeten. ‘Companies need to see the strategic dimension of sustainability reporting’.
A key 245-page book looks at the corporate sustainability reporting standards which companies in Europe will have to meet. The European Sustainability Reporting Standards (ESRS) will apply to a lot more companies than the current rules from 2026 onwards. Companies meeting at least two of three criteria (more than 250 employees, sales exceeding 50 million euros or total assets of more than 25 million euros) will need to report under the new standards as of financial year 2025. ‘Until now, mainly listed companies were targeted. But now five times more companies will have to meet the standards’, says Xavier Baeten, professor of Sustainability & Reward at Vlerick Business School, in his course Take the Lead in Sustainability Management.
What exactly do these standards entail?
XAVIER BAETEN. ‘First of all, you have the general disclosures which apply to everyone. For example, you have to provide information about how you include sustainability criteria in your compensation system, but also, for example, where sustainability knowledge is kept.’
‘In addition, you have the double materiality assessment. Coming from financial reporting, that term implies that an investor should be given all the information needed to make a decision. The same now applies to sustainability. Each company, together with its stakeholders, must determine what the focus should be in sustainability and what should be addressed. While you don’t have to report on everything in detail, you do have to justify your choices.’
‘That assessment goes in two directions. On the one hand, you need to assess your impact on your environment. That varies for each company. A brewery for example may report on water consumption, while a battery factory may concentrate more on human rights. On the other hand, there is financial materiality, i.e., the financial impact of sustainability on the business, involving both risks and opportunities.’
‘And ultimately, Europe also expects targets to be set for the chosen topics. If a food company puts a focus on waste reduction, it will also have to set and achieve tough goals, as, for example, Ahold Delhaize is doing in terms of selling healthy products and reducing food waste.’
Determining your focus does not seem like an easy exercise. How do you begin such a materiality assessment?
BAETEN. ‘That’s indeed no easy matter. Europe provides a series of example topics ranging from air pollution via work-life balance to biodiversity, while also requiring that stakeholders be properly involved in the process. Surprising results are emerging. Solvay customers, for example, appeared concerned about the circularity of products, leading to the company making this a key focus. We know that SMEs are by nature much more locally embedded, maintaining many informal contacts with (local) stakeholders. But they now have to formalise that reporting.’
‘There is a risk that companies may take an overly mathematical approach to their assessment, sending out surveys, joining up the dots, computing averages, etc. This means they will have done what Europe is asking for. But materiality is more an art than a science. Take Sanofi, for example. The company itself came up with a topic not contained in the list: access to medicines. This is obviously particularly relevant and needs to be a focus, along with safety and innovation. At the same time, it decided not to prioritise animal welfare and involvement in the local community. That is not just a general reflection. Its entire strategy is based on that, with specific programmes being developed for it. This is also Europe’s ambition: companies should not view ESRS just as a legal requirement. They have to dare to step out of line and develop tailored plans, allowing them to see the strategic dimension.’
Are companies prepared for what is coming?
BAETEN. ‘A lot is being asked of companies and there is still a lot of uncertainty. For example, companies have to report on their environmental impact at different levels: their own renewable energy, their own emissions, but also the emissions of their suppliers and their raw materials, the way their product gets to the customer and its end-of-life. This means that SMEs are facing a double challenge: to measure themselves, but in many cases also to provide data on clients. Many are struggling with this.’
‘A lot of companies have long cared little about sustainability. These ones are now facing a painful wake-up call. Some are just focusing on being compliant, on being OK. But it is a lot wiser to bite the reporting bullet and get to work on sustainability, embedding it strategically. That creates immense opportunities. Take Signify (formerly Philips Lighting) for example. In a first step, it replaced its product, lighting, with LED lighting. But now it is also working on a social dimension: sensors in public lighting are helping detect violence or measure air pollution. Whole new business models are thus being inspired by sustainability.’
The availability of data is crucial. How do you collect qualitative data on all these sustainability topics?
BAETEN. ‘There is some unease about that, too. There is no intention for the cost of reporting to make half of the companies go bankrupt. Moreover, Europe knows all too well that some things are difficult. Optionally, an estimate is allowed, insofar as it can be justified. You can start out from the data you already have. After all, we already have extensive environmental legislation. In some financial statements you can already find information about compensation, workforce diversity, and so on. Many companies are also now developing software to further automate data collection.’
‘One important side note: don’t start out from data, but from discussions with your stakeholders and the materiality assessment. Then look for data on the important topics. Based on this, you can then determine which data you still need. You won’t do that in two months.’
‘Many companies wonder about the ultimate purpose of all this. A good analysis and clear targets will help your management move forward. The new reporting helps you not only to define your strategy, but also to assess customers and suppliers in a more qualitative manner. And obviously, banks will also be looking at that data when processing applications for financing, even though there is still a long way to go.’
Figuring out the new rules, collecting and analysing data, defining strategies … as a company, how do you get the expertise to handle it all?
BAETEN. ‘A lot of consulting firms are rushing in here. That’s fine, but be selective about who you bring in. It is also best to build up your own expertise. In many companies, we are seeing the finance department taking on the work. That’s a fascinating development, as finance departments always used to steer clear of sustainability. Now that it’s about numbers and reports, that’s changing. You can thus expect your chief financial officer to work on this.’
‘Surveys show that developing the right mindset about sustainability is one of the biggest challenges for SMEs. We often see an ‘hourglass’ development here: at the top corporate management is convinced of the importance of sustainability, while at the bottom employees are also on board. But middle management has its foot on the brake, seeing it as a threat. So, you have to rope them in as well. Ask them whether the subject comes up when they talk to clients, or how they could build sustainability into their day-to-day work. Sustainability has to be part of their day-to-day work.’
In the Take the Lead in Sustanainability Management course, reporting is widely covered. Does the new legislation make such training even more relevant?
BAETEN. ‘Yes, because Take the Lead looks at that reporting more broadly, viewing it as part of the whole company’s sustainability management. We take participants through the entire process: the materiality assessment, collecting data, developing a strategy and setting targets. In addition, we look at what sustainability means, because the term is all too often just focused to emissions. How is your supply chain put together? How do you take this into account in your strategy, in your marketing? It also looks at diversity as an important dimension of sustainability. We thus want to train not only sustainability managers, but people throughout the organisation. Every department has a role to play in a sustainability strategy. In the course, you’ll gain inspiration for your own role, while identifying its connection to the rest of the company.’
‘Participants also learn how to pitch their story to consumers. Research shows that 90 percent of consumers think companies should do more, but at the same time they see a lot of greenwashing. Finding the right tone is crucial. The bottom line: define your focus. Yes, business operations have become more complex. You previously only had to make a profit for shareholders; now you’re in a completely different model. But the importance of making choices and setting priorities has not changed. Companies are thinking much more about their impact, becoming part of the solution.’